The Greeks Explained

In This Lesson

Understanding Delta, Gamma, Theta, and Vega.

Duration: 35 min

Overview

Understanding Delta, Gamma, Theta, and Vega. This lesson will provide you with practical knowledge and actionable insights you can apply to your trading immediately.

By the end of this lesson, you'll have a clear understanding of the concepts and be able to apply them in real trading scenarios. Let's dive into the details.

Key Concepts

Delta - Price Sensitivity

Measures how much an option price changes for a $1 move in the underlying stock.

Gamma - Delta Acceleration

Measures how much delta changes for a $1 move in the underlying. Higher gamma means delta changes faster.

Theta - Time Decay

Amount of money the option loses per day due to time passing, all else being equal.

Vega - Volatility Sensitivity

How much option price changes for a 1% change in implied volatility.

Rho - Interest Rate Sensitivity

How much option price changes for a 1% change in interest rates. Least important for most traders.

Practical Application

Now let's put this knowledge into practice. Follow these steps to apply what you've learned:

1. Learn to read Greeks display on your trading platform for any option position
2. Calculate position delta: multiply contracts by 100 by option delta for stock equivalent exposure
3. Monitor theta daily - know exactly how much time decay costs you each day
4. Check vega before earnings or major events that can change volatility
5. Use gamma to understand acceleration risk, especially near expiration
6. Practice calculating how Greeks change as stock price and time move

Common Mistakes to Avoid

Ignoring Delta When Sizing Positions

Not understanding that a 0.3 delta option moves much less than a 0.7 delta option per dollar of stock movement.

Buying High Theta Options

Purchasing options with high time decay without realizing how much money is lost daily.

Not Understanding Gamma Risk

Being surprised when deep in-the-money options suddenly accelerate in value or at-the-money options become very volatile.

Key Takeaways

Delta tells you how much your position moves with the stock
Theta is your enemy when buying options, friend when selling them
Gamma creates acceleration - both opportunity and risk
Vega matters most around earnings and volatility events
Understanding Greeks transforms you from gambler to calculated trader

Your Next Steps

Ready to continue your learning journey? Here's what to do next:

• Review this lesson's key concepts
• Complete the practical exercises
• Take notes on what you've learned
• Practice with a demo account
• Move on to the next lesson when ready